• Roth IRA Aging Requirement

    31 May 2016
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    A Roth IRA can provide tax-free retirement income, but it doesn’t just happen. Before its earnings can be withdrawn tax-free, the account must be “aged.”

    Unlike traditional IRA accounts, contributions to Roth IRAs provide no tax deduction when they are made, and unlike traditional IRAs, earnings from Roths are tax-free if a distribution is what the IRS refers to as a “qualified distribution.”

    A qualified distribution is one for which: One, the account has satisfied a five-year aging rule AND meets one of the following conditions: the distribution is made after the IRA owner reaches the age of 59.5, the distribution is made after the death of the IRA owner, the distribution is made on account of the IRA owner becoming disabled, OR the distribution (up to $10,000 lifetime, or $20,000 if filing jointly and the spouse also has a Roth IRA) is for a first-time homebuyer purchasing a home.

    Figuring the five-year aging period can be tricky, and the holding period can actually be significantly less than five years. The five-year period:

    Begins on the earlier of: the first day of the individual’s tax year for which the first regular (i.e., non-rollover) contribution is made to any of the individual’s Roth IRAs, or the first day of the individual’s tax year in which the first conversion contribution is made to any of the individual’s Roth IRAs; and ends on the last day of the individual’s fifth consecutive tax year beginning with the tax year described in either (a) or (b) above.

    What complicates this a bit is the fact that a contribution to an IRA for a particular year can be made through the filing due date for the tax year in which the contribution applies. For example, an IRA contribution can be made as late as April 17, 2017, for the 2016 tax year. Thus, the five-year holding period would begin January 1, 2016, and end on December 31, 2020, so any distributions made January 1, 2021, and later would meet the five-year aging period. Each time a contribution is made to the Roth account, the aging period does not start over.

    The five-year aging requirements apply separately for traditional IRA conversions to a Roth IRA referenced in (b) above.

    If for some reason you decide to take a non-qualified distribution from your Roth IRA, i.e., one that does not meet the definition of a qualified distribution (discussed above), then the distributions are treated as made in the following order: from funds originally contributed as Roth contributions (which have no tax consequences), then from conversions of other retirement funds to a Roth IRA (which would be subject to early withdrawal penalties), and finally from earnings (which would be both taxable and subject to early withdrawal penalties).

    If you are planning early retirement or planning to tap your Roth IRA account and wish to explore your options while minimizing taxes and penalties, please call Dagley & Co. for an appointment.

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  • Due Dates June 2016 – Individual and Business

    29 May 2016
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    June 2016 Individual Due Dates

    June 10 – Report Tips to Employer

    If you are an employee who works for tips and received more than $20 in tips during May, you are required to report them to your employer on IRS Form 4070 no later than June 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

    June 15 – Estimated Tax Payment Due

    It’s time to make your second quarter estimated tax installment payment for the 2016 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include: payroll withholding for employees; pension withholding for retirees; and estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

    When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.

    Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the “de minimis amount”), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:  The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

    Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.

    However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

    This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.

    CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call Dagley & Co. for particular state safe harbor rules.

    June 15 – Taxpayers Living Abroad

    If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, June 15 is the filing due date for your 2015 income tax return and to pay any tax due. If your return has not been completed and you need additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then, file Form 1040 by October 17. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline (see below).

    Caution: This is not an extension of time to pay your tax liability, only an extension to file the return. If you expect to owe, estimate how much and include your payment with the extension. If you owe taxes when you do file your extended tax return, you will be liable for both the late payment penalty and interest from the due date.

    Combat Zone – For military taxpayers in a combat zone/qualified hazardous duty area, the deadlines for taking actions with the IRS are extended. This also applies to service members involved in contingency operations, such as Operation Iraqi Freedom or Enduring Freedom. The extension is for 180 consecutive days after the later of: The last day a military taxpayer was in a combat zone/qualified hazardous duty area or served in a qualifying contingency operation, or have qualifying service outside of the combat zone/qualified hazardous duty area (or the last day the area qualifies as a combat zone or qualified hazardous duty area), or the last day of any continuous qualified hospitalization for injury from service in the combat zone/qualified hazardous duty area or contingency operation, or while performing qualifying service outside of the combat zone/qualified hazardous duty area.

    In addition to the 180 days, the deadline is also extended by the number of days that were left for the individual to take an action with the IRS when they entered a combat zone/qualified hazardous duty area or began serving in a contingency operation.

    It is not a good idea to delay filing your return because you owe taxes. The late filing penalty is 5% per month (maximum 25%) and can be a substantial penalty. It is generally better practice to file the return without payment and avoid the late filing penalty. We can also establish an installment agreement which allows you to pay your taxes over a period of up to 72 months.

    Please contact Dagley & Co. for assistance with an extension request or an installment agreement.

    June 30 – Taxpayers with Foreign Financial Interests

    A U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form FinCEN 114 with the Department of the Treasury (not the IRS). The form must be filed with the Treasury Department no later than June 30, 2016 for 2015. No extension of time to file is permitted. The form must be filed electronically; paper forms are not allowed. This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2015. Contact Dagley & Co. for additional information and assistance filing the form.

    June 2016 Business Due Dates

    June 15 – Employer’s Monthly Deposit Due

    If you are an employer and the monthly deposit rules apply, June 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for May 2016. This is also the due date for the non-payroll withholding deposit for May 2016 if the monthly deposit rule applies.

    June 15 – Corporations

    Deposit the second installment of estimated income tax for 2016 for calendar year corporations.

    June 30 – Taxpayers with Foreign Financial Interests

    A U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form FinCEN 114 with the Department of the Treasury (not the IRS). The form must be filed with the Treasury Department no later than June 30, 2016 for 2015. No extension of time to file is permitted. The form must be filed electronically; paper forms are not allowed. This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2015. Contact Dagley & Co. for additional information and assistance filing the form.

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  • Surviving Spouse Estate Tax Exclusion

    27 May 2016
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    An account of everything an individual owned or had interest in on the date of their death is included in the tax on the transfer of their property. This is called the estate tax. This includes cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets. The tax is based on the fair market value of these assets (less certain exclusions), generally as of the day the decedent died.

    An inflation-adjusted lifetime exclusion prevents smaller estates from being taxed. This exclusion is $5,450,000 for 2016, but it is adjusted (reduced) by the value of untaxed gifts that the decedent gave in excess of the annual gift exemption (currently $14,000) over his or her lifetime. Thus, if the value of all the decedent’s property is less than the adjusted exclusion amount, there would be no estate tax and, generally, no need to file an estate tax return. However, filing an estate tax return when it otherwise wouldn’t be needed may be beneficial to the surviving spouse when the decedent was married.

    When a decedent is survived by a spouse and the decedent’s estate is worth less than the adjusted lifetime exclusion, the estate of the decedent may elect to pass any of the decedent’s unused lifetime exclusion to the surviving spouse. Considering that estate tax rates currently range from 18 to 40 percent, this can be very beneficial if the estate of the surviving spouse could exceed the adjusted lifetime exclusion when he or she subsequently passes.

    Example – A husband with an estate valued at $2 million died in 2014, having made prior taxable gifts of $1 million. Even though there was no estate tax return filing requirement, the decedent’s spouse filed one to claim the election to pass the decedent’s unused lifetime exclusion to his spouse. The husband’s unused exclusion amount was $2.34 million, which is the 2014 estate tax exemption of $5.34 million minus the $1 million in prior taxable gifts and the $2 million value of his estate. His spouse can then add his unused exclusion to her own. Assuming that the spouse has made no taxable gifts, if she passes in 2016, her estate’s exclusion amount for 2016 would be $7.79 million (her $5.45 million basic exclusion amount plus $2.34 million of her spouse’s unused exclusion amount).

    For the surviving spouse (or his or her estate) to claim the deceased spouse’s unused exclusion amount, the estate of the first spouse to die must make an election, referred to as the portability election, by filing a timely estate tax return. The estate tax return must include a computation of the unused exclusion amount. This is true even if the value of the estate is not enough to require an estate tax return to be filed.

    This presents a quandary for the executor (or other representative of the estate, often the surviving spouse), who must decide whether it is worth the cost of having an estate tax return prepared and filed when there is no requirement to do so outside of making the portability election (as estate tax returns are quite complicated and expensive).

    When making this decision, an executor needs to carefully consider the likelihood of the surviving spouse’s estate exceeding the adjusted lifetime exclusion amount. Another factor to consider is that Congress has changed both the lifetime exclusion amount and the estate tax rates in the past; as this topic seems to be a constant subject of discussion in Washington, there are no guarantees that the exemption will remain at its current level. If the executor is not the surviving spouse, he or she will ideally consult with the widow(er) on the decision, but this is not required. This could pose a problem if there is animosity between the executor and the surviving spouse. To avoid this situation, if someone other than the spouse is the executor of the estate for the first spouse to die, it is a good idea to include language in the couple’s wills or trusts that will require the executor to make the portability election.

    If you have questions related to this election, the lifetime exclusion, the annual gift tax exemption, or estate planning in general, please give Dagley & Co. a call.

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  • Employers, Don’t Miss the Work Opportunity Tax Credit

    23 May 2016
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    Employers who hire individuals from targeted groups are qualified to claim the work opportunity tax credit (WOTC) through 2019. The credit is elective, and if claimed it reduces the employer’s wage deduction dollar for dollar.

    The credit is a percentage of the employee’s first-year wages, generally up to $6,000 per eligible employee, paid during the tax year for work performed during the one-year period beginning on the date the target group member begins work for the employer.

    This provides a tax credit worth as much as $2,400 for each eligible employee (and up to $4,800, $5,600 or $9,600 for certain veterans or $9,000 for “long-term family assistance recipients”).

    For the full credit (40%), the targeted employee must work for a minimum of 400 hours in the first year. For those that work between 120 and 399 hours, the credit percentage is reduced to 25%.

    Targeted groups after 2015 include qualified:

    Veterans – the first-year wages considered for this group vary between $12,000 and $24,000 with a maximum credit between $4,800 and $9,600 per employee, depending on the period of unemployment, whether he or she is receiving service-connected disability payments, and when he or she was discharged from active duty service.

    Long-term unemployed individuals (unemployed for 27 consecutive weeks)


    Recipients of Temporary Assistance for Needy Families (TANF) program

    Designated community residents

    Vocational rehabilitation referrals

    Summer youth employees – Special rules apply – The credit is 40% for up to $3,000 of wages paid during any 90-day period between May 1 and Sept. 15, for a maximum credit of $1,200 ($3,000 × 40%) per employee.

    Supplemental nutrition assistance benefits recipients

    SSI recipients

    Long-term family assistance (TANF) recipients – The first-year wages considered for this group amount to $10,000 with a maximum credit of $4,000 per employee. In addition, this group qualifies for a second-year credit equal to 50% of up to $10,000 of the second-year wages.

    Before claiming the credit, an employer must obtain certification that an individual is a member of the targeted group. This is done by filing Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with the employer’s respective state workforce agency (Designated Local Agency) within 28 days after the eligible worker begins work, although additional time is provided in some cases.

    Claiming the WOTC may also impact the availability of certain other employment-related tax credits. The credit is generally not available for employment of prior employees, certain family members, and replacements for employees on strike or locked out and employees who are receiving federally funded on-the-job training. This credit is part of the general business credit and subject to its limitations and carryover provisions.

    Please call Dagley & Co. for additional information or assistance in applying for employee credit certification.

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  • Claimed Premium Tax Credit Last Year? Odds of IRS Correspondence Increased

    19 May 2016
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    Your odds of receiving correspondence from the IRS could increase if you claimed the PTC on your tax return. Everyone hates to get letters from the IRS, but if you did claim the Premium Tax Credit (PTC) on your tax return or obtained your insurance through one of the federal or state insurance Marketplaces and had your premiums subsidized with the Advance Premium Tax Credit (APTC), this is probably why you’re hearing from them. This is due to the complexity of the Affordable Care Act (ACA) and its maze of tax reporting requirements to ensure taxpayers correctly comply with the ACA’s many provisions.

    One of the cornerstones of the ACA is the PTC, which is a refundable tax credit that helps lower-income families pay for their health insurance when they obtain it from a state or the federal insurance Marketplace. The amount of the PTC for a family is based on the family size and their household income as compared to the federal poverty guidelines. The insurance Marketplace allows (and actually encourage) families to claim an APTC based upon an estimate of income for the year, but then the tax-return filer must reconcile the APTC with the PTC the family is actually entitled to. This is done on the tax return for the year submitted to the IRS by the filer in the subsequent year.

    Individuals who might otherwise not need to file a tax return are required to file if they or someone in their family received APTC so that the reconciliation with the PTC can be done. If a return is not filed, then they will not be eligible for APTC or cost-sharing reductions to help pay for the Marketplace health insurance coverage in future years. In other words, they will be responsible for the full cost of their monthly premiums.

    Many taxpayers fail to complete the reconciliation on their tax return, which can result in an additional credit over and above the APTC claimed at the Marketplace, or on the flip side, they may have to repay some portion of the APTC. If the IRS computer compares the Form 1095-A from the Marketplace to what is reported on the tax return and finds the reconciliation was not completed or was completed incorrectly, or that the taxpayer failed to file a return, the taxpayer can expect to receive correspondence from the IRS.

    New for 2015 is the employer-reporting requirement, Form 1095-C, where employers report whether they offered employees affordable health care insurance. The rub here is that the ACA does not allow the PTC for any month when the employer offers the employee affordable health care insurance. The year 2015 is the first year for such reporting, and taxpayers who claimed the PTC when their employer offered them affordable health care insurance will soon be receiving letters from the IRS requesting repayment of any APTC they received through the Marketplace and/or the PTC they claimed on their 2015 tax returns.

    Another issue that could generate IRS correspondence is when a taxpayer receives a corrected 1095-A from a Marketplace with corrected premium amounts, the cost of second-lowest silver insurance, and/or the amount of APTC paid that differ from the original amounts. Unless the changes are insignificant, the corrected amounts will change the amount of the PTC the taxpayer is entitled to, and if the taxpayer has not already amended their tax return to correct the PTC, he or she will no doubt receive correspondence from the IRS. This is true even though the error in reporting is the government’s (Marketplace’s) fault.

    CAUTION: While legitimate correspondence from the IRS should not be ignored, be aware that all of these issues provide ID thieves and scammers with opportunities to develop plans to scam taxpayers. If you receive any form of communication from the IRS, always be suspicious. This is especially true of e-mails, which the IRS rarely uses and then only if contact has first been made by correspondence. Never click on any links embedded in such an e-mail, as your computer or phone may end up with a virus or embedded cookie, or you may be taken to a site disguised as an IRS site where the scammers attempt to have you divulge ID information. If you receive a phone call from an alleged IRS agent asking for immediate payment, simply hang up—it is a scam. Scam artists prey on everyone’s natural fear of the IRS by using threats of property seizure and even arrest.

    Don’t be a victim; call Dagley & Co. whenever you receive communications from the IRS or state taxing authorities.

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  • Oops, Did You Forget Something on a Tax Return?

    17 May 2016
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    It is not too late if you overlooked an item of income or forgot to claim a deduction or credit on your already filed tax return. An amended return can be filed to correct an already filed tax return. Failing to report an item of income will most certainly generate an IRS inquiry, which typically happens a year or more after the original return was filed and after the interest and penalties have built up. Therefore, it is best to file an amended return as soon as possible to avoid the headache of IRS correspondence and to minimize the interest and penalties on any additional tax you might owe.

    On the flip side, if you overlooked a significant deduction or tax credit and you have a refund coming, you certainly don’t want that to go by the wayside.

    The solution is to file an amended return as soon as the error or omission is discovered. Amended returns can also be used to claim an overlooked credit, correct the filing status or the number of dependents, report an omitted investment transaction, submit information from delayed K-1s, or anything else that should have been reported on the original return.

    If the overlooked item will result in a tax increase, penalties and interest can be mitigated by filing an amended return as soon as possible. Procrastination leads to further complications once the IRS determines something is missing, so it is best to take care of the issue right away.

    Generally, to claim a refund, an amended return must be filed within three years from the date the original return was filed or within two years from the date the tax was paid, whichever is later.

    If any of the above applies to your situation, please give Dagley & Co. a call so we can prepare an amended tax return for you.

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  • Receiving Cash Tips? The IRS Is Watching

    13 May 2016
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    If you collect tips, you must include them in your taxable income. This requirement is not limited to waiters and waitresses; it applies to anyone who collects tips, including taxicab drivers, beauticians, porters, concierges, etc.

    Tips are amounts freely given by a customer to a person providing a service. They are generally given as cash, but they include tips made on a credit or debit card or as part of a tip-sharing arrangement. Tips can also be in the form of non-traditional gifts such as tickets to events, wine and other items of value. If you receive $20 or more in tips in any month, you should report all of your tips to your employer, with these exceptions:

    Tip-splitting Tips you give to others under a tip-splitting arrangement are not subject to the reporting requirement by you (the employee initially receiving them). You should report to your employer only the net tips you received.

    Service (cover) charges — These are charges arbitrarily added by the business establishment (employer) — for example, a specific percentage of the bill for parties exceeding X in number — and are excluded from the tip-reporting requirements. If your employer collects service charges from customers, your share of these charges, as determined by your employer, is taxable to you and should already be included as part of your wages.

    Keep a running daily log of tip income Tips are a frequently audited item, and it is a good practice to keep a daily log of your tips. The IRS provides a log in Publication 1244 that includes an Employee’s Daily Record of Tips and a Report to Employer for recording your tip income.

    Report tips to your employer If you receive $20 or more in tips in any month, you should report all of your tips to your employer. Your employer is required to withhold federal income, Social Security, and Medicare taxes. If the tips received are less than $20 in any month, don’t think you are off the hook; although they need not be reported to the employer, these tips are still taxable and must be reported on your tax return, as they are subject to income, Medicare and Social Security taxes.

    Employer allocation of tips If you work for a large restaurant, you may find when you get your W-2 form that you got tips you didn’t know about. Restaurants with a large serving staff report a total called “allocated tips” to the IRS. Here is what allocated tips are all about:

    Tip allocation applies to “large food and beverage establishments” (i.e., food service businesses where tipping is customary and that have 10 or more employees). These establishments must allocate a portion of their gross receipts as tip income to those employees who “underreport,” which happens if an employee reports tips that are less than 8% of the employee’s share of the employer’s gross sales. The employer must allocate to those underreported employees the difference between what the employee reported and the 8% amount.

    If this situation applies to you, the allocation amount will be noted in a separate box on your W-2, and these allocated tips won’t be included in the total wages shown on your W-2 form. You will need to report the allocated tip amount as additional income on your tax return unless you have adequate records to show that the amount is incorrect. The IRS frequently issues inquiries where the taxpayer’s W-2 shows an allocation of tips and a lesser amount is reported on the tax return.

    Self-Employed Individuals – If you are self-employed, you don’t have an employer to report tips to, and you simply include the tips you’ve received in your self-employed income on your tax return for the year you received the tips.

    Because they are usually paid in cash, tips are a frequent audit item. If you are receiving tips and have any questions, please give Dagley & Co. a call.

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  • Most Overlooked Tax Deduction

    11 May 2016
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    The IRD deduction is one of the most overlooked tax deductions. IRD is the acronym for income in respect of a decedent. So what is IRD income? It is income that is taxable to the decedent’s estate and also taxable to the beneficiaries of the estate.

    Estate tax is a tax on property transfers. Thus, when an individual dies, the value of all of his property is added up and the amount that exceeds the lifetime estate tax exclusion (currently at $5.45 million) less any prior taxable gifts is subject to estate tax. In some cases the estate includes items that are taxable both to the estate and to the beneficiaries, such as a traditional IRA, uncollected business income, and accrued bond interest. To make up for this double taxation, the beneficiaries are allowed an itemized deduction for the portion of the estate tax attributable to the double-taxed income.

    The problem is that the beneficiaries do not receive anything from the estate to make them aware of an IRD deduction or the amount of the deduction, if one exists. A beneficiary must recognize when there is an IRD and a possibility of a deduction and make further inquiries.

    The first clue is, did you as a beneficiary of the estate receive a Form 1099-R or Schedule K-1 with taxable income from the estate? If so, you need to inquire whether a Form 706 Estate Tax Return was filed, and if so, whether it resulted in tax due. If there was a tax due, then there is a good chance you are entitled to an IRD deduction. Request a copy of the 706 Estate Tax Return and provide it to this office so we can determine whether you are entitled to a deduction and if so, how much it is worth.

    The deduction is generally the difference in the estate tax figured with and without the double-taxed income. Please call Dagley & Co. if you need additional information.

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  • Time-Share Use as a Charitable Contribution

    9 May 2016
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    Have you ever attended a charity auction? If so, it is not uncommon to see a week’s use of a time-share included in the items donated for auction. The time-share owners who donate these weeks generally do so in anticipation of being able to take charitable donation deduction on their tax returns.

    How does one determine how much one can deduct for such a donation? The answer may come as a surprise. Per an IRS revenue ruling(1), the use of a property, or the permission to use and occupy a property, does not constitute a gift of property. In addition, the Internal Revenue Code does not allow a charitable deduction for a gift of a partial interest in a property unless this is done in trust(2). Therefore, no charitable contribution deduction is allowed for the use of a time-share property.

    Time-share owners are generally required to pay an annual maintenance fee that covers the pro rata upkeep of the resort itself, plus housekeeping services. The question arises: Can the time-share owner deduct the maintenance fee for the week donated?

    IRS regulations (3) allow deductions for expenses incurred in connection with personally rendered services to a qualified organization. However, services provided by others, even if paid for by the taxpayer, are not personally rendered to the charity and thus are not deductible. Since this includes the services provided by the time-share management company that is paid for with the taxpayer’s maintenance fees, the time-share’s maintenance fees for the donated period are not deductible.

    However, if the taxpayer incurred other expenses in connection with the donated use of the time-share, such as driving to the time-share property to let the winning bidder into the unit, a deduction for those expenses would be allowed under IRS regulations (3). This is because the time-share owner would be performing the service directly for the charitable organization; a mileage deduction at the rate of 14 cents per mile would be allowed.

    As a bottom line, the donation of the use of a time-share does not constitute a charitable contribution. If you have questions related to charitable contributions please give Dagley & Co. a call.

    • Rev Rul 70-477, I.R.B. 1970-3
    • IRC Sec 170(f)(3)(A)
    • IRS Reg 1.170A-1(g).

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  • Back-Door Roth IRAs

    6 May 2016
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    Though many individuals who are saving for retirement favor Roth IRAs over traditional IRAs, not everyone is allowed to make a Roth IRA contribution. Many favor Roth IRAs because it allows for both accumulation and post-retirement distributions to be tax-free. In comparison, contributions to traditional IRAs may be deductible, earnings are tax-deferred, and distributions are generally taxable. Anyone who is under age 70.5 and who has compensation can make a contribution to a traditional IRA (although the deduction may be limited).

    High-income taxpayers are limited in the annual amount they can contribute to a Roth IRA. The maximum contribution for 2016 is $5,500 ($6,500 if age 50 or older), but the allowable 2016 contribution for joint-filing taxpayers phases out at an adjustable gross income (AGI) between $184,000 and $194,000 (or an AGI between $0 and $9,999 for married taxpayers filing separately). For unmarried taxpayers, the phase-out is between $117,000 and $132,000.

    However, tax law also includes a provision that allows taxpayers to convert their traditional IRA funds to Roth IRAs without any AGI restrictions. Although deductible contributions to a traditional IRA have AGI restrictions (for those who are in an employer’s plan), nondeductible contributions do not.

    Thus, higher-income taxpayers can first make a nondeductible contribution to a traditional IRA and then convert that IRA to a Roth IRA. This is commonly referred to as a “back-door Roth IRA.”

    BIG PITFALL: However, there is a big pitfall to back-door IRAs, and it can produce unexpected taxable income. Taxpayers and their investment advisers often overlook this pitfall, which revolves around the following rule: For distribution purposes, all of a taxpayer’s IRAs (except Roth IRAs) are considered to be one account, so distributions are considered to be taken pro rata from both the deductible and nondeductible portions of the IRA. The prorated amount of the deducted contributions is taxable. Thus, a taxpayer who is contemplating a back-door Roth IRA contribution must carefully consider and plan for the consequences of this “one IRA” rule before making the conversion.

    There is a possible, although complicated, solution to this problem. Rolling over IRAs into other types of qualified retirement plans, such as employer retirement plans and 401(k) plans, is permitted tax-free. However, a rollover to a qualified plan is limited to the taxable portion of the IRA. If an employer’s plan permits, a taxpayer could roll the entire taxable portion of his or her IRA into the employer’s plan, leaving behind only nondeductible IRA contributions, which can then be converted into a Roth IRA tax-free.

    Before taking any action, please call Dagley & Co. to discuss strategies for making Roth IRA contributions or to convert existing traditional IRAs into Roth IRAs.

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